Standing Committee D

[John Bercowin the Chair]

Clause 22

Entrenched provisions of the articles

Amendment proposed [this day]: No. 81, in clause 22, page 9, line 3, leave out paragraph (a).—[Margaret Hodge.]

Question again proposed, That the amendment be made.

John Bercow: I remind the Committee that with this we are discussing the following: amendment No. 8, in clause 22, page 9, line 3, leave out from ‘repealed' to end of line 6.
Government amendment No. 83.
Clause stand part.
Amendment No. 9, in clause 23, page 9, line 18, leave out subsection (2).
Amendment No. 48, in clause 23, page 9, line 22, leave out subsections (3) and (4).
Amendment No. 23, in clause 112, page 50, line 17, after ‘addresses', insert
‘(which, for the avoidance of doubt, need not be a home address)'.
Clause 23 stand part.
Amendment No. 10, in clause 24, page 9, line 28, after ‘articles', insert ‘by unanimous resolution'.
Amendment No. 11, in clause 24, page 9, line 28, after ‘articles', insert
‘by unanimous resolution less one vote'.
Amendment No. 12, in clause 24, page 9, line 28, after ‘articles', insert
‘by a resolution of at least 90% of its members'.
Clause 24 stand part.

Jonathan Djanogly: Mr. Bercow, I welcome you to the Chair. I understand that it is your first Bill Committee, and what a Committee to be put on. I was trying to think of some relevant Chinese proverb, but it is highly interesting, and all good stuff. We welcome you, and I am sure that you will make an excellent Chairman.
We were discussing clauses 22, 23 and 24 at some length. I tend to agree with the Minister. During some of her last remarks, we started to turn the wheel around again, so I do not intend to go on at length. We have made clear our objections not only to the mechanics, but to the principle of clause 22. For that reason, I will recommend to my hon. Friends that we vote against clause stand part.

Question put, That the amendment be made:—

The Committee divided: Ayes 11, Noes 2.

Question accordingly agreed to.

Amendments made: Government Amendment No. 82, in clause 22, page 9, line 4, leave out ‘altered' and insert ‘amended'.
Government amendment No. 83, in clause 22, page 9, line 11, at end insert—
‘( ) Provision for entrenchment does not prevent amendment of the company's articles by agreement of all the members of the company.'.—[Margaret Hodge.]

Motion made, and Question put, That the clause, as amended, stand part of the Bill.

The Committee divided: Ayes 13, Noes 6.

Question accordingly agreed to.

Clause 22, as amended, ordered to stand part of the Bill.

Clause 23

Notice to registrar in case of entrenched provisions

Amendment made: No. 84, in clause 23, page 9, line 16, leave out ‘altered' and insert ‘amended'.—[Margaret Hodge.]

Clause 23, as amended, ordered to stand part of the Bill.

Clause 24

Notice to registrar of removal of entrnched provisions

Amendments made: No. 85, in clause 24, page 9, line 27, leave out ‘alters' and insert ‘amends'.
No. 86, in clause 24, page 9, line 32, leave out ‘alteration' and insert ‘amendment'.—[Margaret Hodge.]

Clause 24, as amended, ordered to stand part of the Bill.

Clauses 25 and 26 ordered to stand part of the Bill.

Clause 27

Registrar’s notice to comply in case of failure with respect to amended articles

Jonathan Djanogly: I beg to move amendment No. 49, in clause 27, page 10, line 31, leave out ‘200' and insert ‘1,000'.

John Bercow: With this it will be convenient todiscuss amendment No. 50, in clause 27, page 10, line 31, at end insert
‘and, for continued contravention, a daily default fine of £100'.

Jonathan Djanogly: The Minister may have noticed that I tend to speak to those amendments first raised in the other place only when I feel that I have something to offer that could move the argument forward. It is quite hard to do that on this clause. We are talking about whether a figure should be this amount or that amount.
The amendments are probing. I thought it was worth questioning what was said in the Lords. Lord McKenzie of Luton said:
“We consider that £200 is the right amount for the one-off civil penalty. It is not our intention to overpenalise companies through that route but rather to encourage compliance with the law.”—[Official Report, House of Lords, 30 January 2006;Vol. 678, c. GC23.]
I do not think that either side of the debate had a heavyweight legal argument. It comes down to the question of what is an appropriate amount to act as an incentive to companies to use the amended articles. For the average company, £200 is not much of a deterrent, especially given that preferably it would mostly be dealt with by way of civil rather than criminal proceedings. I know that the general mood is that such things should be dealt with as civil matters, and this is one such instance. We feel that if the amount was slightly higher, the civil route would be more attractive than the criminal route.

Margaret Hodge: I welcome you to the Chair, Mr. Bercow, and I wish you well in your job. Given your record, I am delighted that you are in the Chair rather than anywhere else. I have looked up your details and I see that you went to Essex university to look for trouble; and you then became a member of Lambeth council to pick a fight. There is no better place to do that than this Committee, so I am thankful that you are Chairman. I am even more thankful about it because of your record for asking lots and lots of questions—2,619 parliamentary questions in less than a year. I fear that had you been on the Opposition Benches in Committee, we might not have completed our business even by the end of October. I look forward to serving under your wise chairmanship.
The hon. Member for Huntingdon (Mr. Djanogly) was right that it is an issue of judgment as to where the fine should lie. It is our view that a civil penalty of £200 is about right if a company is given notice underclause 27 to remedy the breach within 28 days and fails to do so. All members of the Committee should note that the civil penalty does not take away from the ability to pursue a criminal case if required. The criminal penalty would be a level 3 fine, which is about £1,000. We are leaving it there; our judgment is that £200 is about right. Companies may be in arrears with their filing obligations through inadvertence. Clause 27 is a deregulatory measure that provides companies with the opportunity to bring their filing up to date without risking criminal sanctions. It is not intended as a substitute for the criminal sanctions that would have a higher penalty rate.
I accept that there is no particular magic in the figure that we have chosen. It is simply there to give some teeth and to encourage the companies to provide the registrar with up-to-date copies of their articles within the period of the prescribed notice. Equally, we cannot see any particular benefit in raising the penalty to the level suggested in the amendment. Given that the matter was also debated in another place, as the hon. Gentleman said, I hope that he will withdraw the amendment to enable us to continue with consideration of the Bill.

Jonathan Djanogly: I remember you, Mr. Bercow, as a student looking for trouble. Thinking back to those days, I could hardly have thought that here we would be some 20 years later, but such is life. It could have been worse.
I hear what the Minister has to say. I am not sure that I entirely agree, but then again I do not think that this is a die-in-the-ditch point. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 27 ordered to stand part of the Bill.

Clause 28

Existing companies: provisions of memorandum treated as provisions of articles

Jonathan Djanogly: I beg to move amendment No. 13, in clause 28, page 11, line 7, at end insert—
‘(4) If there is a conflict between a provision which immediately before the commencement of this Part was contained in a company's memorandum of association and a provision contained in that company's articles of association, the former shall prevail.'.
The clause deals with existing companies and with provisions of memorandum treated as provisions of articles, and contains new provisions. When there is a conflict between the memorandum of association and the articles of association, case law would dictate that the provisions in the memorandum of association would take precedent. Under clause 28(1), the parts of a company’s memorandum of association that do not constitute part of the new style memorandum will be treated as being in the articles. Clearly, it would be ideal for companies to change their articles at that point so that they can review all clauses in context and prioritise accordingly. However, life being what it is, it is likely that the vast majority of small private companies will not do that, mainly because it involves paying corporate lawyers fees for essentially non-productive work. The question of priority will be important in practice.
In the Lords Grand Committee, Lord McKenzie spoke of returning to the issue on clause 882. To be frank, I am not sure whether that was done; perhaps the Minister could put me right. On Report, the Government said that they would consult on the issue. Could she update us on when and how the consultation is likely to take place?

Margaret Hodge: I am grateful for the amendment being tabled, because it raises an important issue:what happens when a provision in a company’s memorandum immediately before the commencement of the Bill comes into conflict with a provision in the same company’s articles? That is an important issue because, as the hon. Gentleman said, where there is conflict between provisions in the memorandum and those in articles, the provisions in the memorandum take precedence. We will need to make further proper and appropriate arrangements to ensure that the position regarding competing provisions is clear.
The hon. Gentleman referred to the debate in the other House where we gave an undertaking to look at that and other transitional issues. As we said this morning, transitional issues run through many clauses in the Bill, and there will be a round of consultation on that.
As it was in the other place, clause 882 has become clause 921 in the Bill before us. That is why I looked a little bewildered. If the hon. Gentleman were to look at clause 921, he would see that it provides for a power to make transitional arrangements. During the summer and early autumn, we hope to consult on what those transitional provisions should be. I hope he agrees that we should legislate after we have explored all the issues with interested parties. That is what we intend to do.
The clause is trying to provide a default position to give legal certainty when something goes wrong. We want to be careful about enacting a rule that could result in obsolete provisions being given more weight than was intended. For example, it might be that we should allow existing companies a transitional period in which to consider the effect of subsection (1) and whether each provision of their memorandum, which will be deemed part of their articles, should be retained as ordinary provision amended, removed altogether or entrenched.
We would rather decide how to deal with that substantive point on conflicts at the same time as we make rules on when, and in what circumstances, the clause and other new rules on companies’ constitutional documents will apply to existing companies. So, in the spirit of that explanation, I hope the hon. Gentleman is content and will withdraw the amendment.

Jonathan Djanogly: I appreciate the Minister’s answer and the general points that she made, although I must point out that that issue was raised in February in the Lords and again on Report in May, and here we are with it still outstanding. Perhaps she will give us an idea of when we are likely to hear that the issue is being moved forward.
I make also one general point: as the Minister said, a huge number of transitional issues are coming out of the Bill, and many relate to specific and technical matters of corporate law. Does she intend to put together a schedule of transitional issues, which would be of great help, not only to hon. Members, but to organisations such as the Law Society, which will have to gear up to thinking about such matters? It would be helpful if a table was put together.

Margaret Hodge: That seems appropriate, so we will provide such a schedule.
In my previous contribution, I said that in the summer and early autumn, we will be consulting on our proposals for transitional arrangements. We will publish the final orders some time after Royal Assent has been given, but the consultation should take place in the summer and early autumn.

Jonathan Djanogly: May I ask the Minister for one more round on this? I am concerned that things will happen very quickly when we come back from the summer recess. We have only one day for consideration on Report, when the Lords had four. Given that people will be away during the summer recess, it is important that the transitional arrangements are shown around the City as early as possible. We might have something to add as well. She should keep that in mind, because I have no doubt that consideration on Report and Third Reading will be upon us.

Margaret Hodge: We are taking a power to make regulations, so we will not need to have finally determined those transitional arrangements by the time of Royal Assent. There will be plenty of consultation time to ensure that all stakeholders feel happy with the propositions that we put before them, and I give the hon. Gentleman the assurance that we want the transition between the old legislation and the new to be as seamless, comfortable and easy for companies as possible.

Jonathan Djanogly: I have taken the issue as far as it can go. The Minister has heard my concerns, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 28 ordered to stand part of the Bill.

Clause 29

Resolutions and agreements affecting a company’s constitution

Jonathan Djanogly: I beg to move amendment No. 14, in clause 29, page 11, line 42, at end insert—
‘(3) Reference to a resolution in subsection (1) above, shall not include any document referred to in such a resolution.'.

John Bercow: With this it will be convenient to discuss amendment No. 182, in clause 30, page 12,line 16, at end add—
‘(5) Resolutions or agreements under section 29(1)(b) to (d) shall not be enforceable unless recorded by the registrar.'.

Jonathan Djanogly: I shall speak to amendment No. 14. as amendment No. 182 has been tabled by the Liberal Democrats.
I am not wholly sure that the drafting of the amendment is as finely tuned as it could be, but I shall make my point anyway. Sometimes there is confusion about what needs to be filed at Companies House and what does not. If the Companies Act 1985 states that a document needs to be filed, that is clear. For instance, if a resolution that changes a company’s articles is passed, the 1985 Act dictates that the resolution and a new copy of the article are to be filed. However, what would happen if the articles referred to some other document? Would that also have to be filed?
The typical example here is when the parties to a joint venture or a private equity investor wish to put the public on notice of the existence of a shareholders’ agreement by mentioning that fact in the articles of the investee company. My hon. Friend the Member for Hornchurch (James Brokenshire) is nodding avidly; he will have seen that in practice many times.
In such a situation, there seems to be a precedent that indicates that the joint venture agreement also needs to be filed. However, the agreement may contain confidential or price sensitive information that the parties do not wish to place on the public record—hence the reason for tabling the amendment.

David Howarth: May I add my own expression of delight at seeing you in the Chair, Mr. Bercow? I do not know what you have done to deserve it, but it must have been impressive.
Amendment No. 182 is largely probing. It seeks to establish whether the Government have thought through how the clauses work. My understanding of them is that if a shareholders’ agreement is not sent to the registrar, an offence is committed, but the agreement itself is still valid as between the parties. The purpose of the amendment is to ask the Government whether they intend that to be the case.
I am not sure how far to press it, but there is a case for the amendment, which is that making agreements unenforceable by the parties themselves would be a far more effective way to ensure their registration. Shareholders’ agreements are often constitutional documents of the company, and it is important for investors to be able to see them so that they are on notice that they exist, and to be able to see their terms—for instance, during due diligence.
My question for the Government is whether the wording of the Bill represents their intention. If so, why is that the case? If not, will they go away and think about it?

Margaret Hodge: I shall address the amendments in the order in which they were spoken to, so I shall deal first with amendment No. 14, which would qualify and limit the meaning of references to “a resolution” in clause 29(1).
The amendment would restrict the information to be provided to the registrar under clause 30, which provides for copies of resolutions and agreements to be forwarded to and recorded by the registrar, and that to be provided to the company’s members under clause 33, which requires companies to provide various constitutional documents to their members free of charge on request—including the types of resolution listed in clause 29. It would also restrict what is to be embodied in or annexed to companies’ articles of association under clause 31.
The amendment would clearly cut down the amount of paper and information that companies would be required to produce when they were required to make available copies of certain resolutions, but the danger of such a restriction is that the recipient of the resolution in question would receive only half the story. When the meat of a resolution is contained in another document, which may be attached to the resolution, that restriction would clearly be undesirable.
A resolution might, for example, refer to two documents: A and B. Document A might set out the provisions altering the effect of the company’s articles, and if that were not supplied with the resolution, there would not be much point in receiving a copy of the resolution. Document B might have no real bearing on the resolution’s meaning, so that not much would be lost if it were not supplied. The amendment would result in companies not being obliged to supply either document, and we would have thrown out the baby with the bathwater.
Would the company be obliged to supply a copy of the irrelevant document B under clause 31 as drafted? If the document were not part of the resolution, the answer would be no. So, on joint venture agreements, if they were part of the resolution, they would have to be supplied; if not, they would not have to be supplied.

Jonathan Djanogly: That is an interesting and helpful answer, which many practitioners will be pleased to hear, but I would like to clarify the point.
Using the Minister’s example, there are documents A and B. If either were mentioned in the resolution, she is saying, I believe, that they would need to be filed. However, if document C were mentioned in one of the documents mentioned in the resolution, it would not have to be filed.

Margaret Hodge: I shall come back to the hon. Gentleman if I get the answer wrong, but my view is that any document that is relevant to the resolution would need to be filed. If it were not relevant to the resolution, it would not need to be filed.
If I am right—I hope that I am—the burden that the amendment would alleviate is illusory. In any event, the obligations relating to resolutions and agreement mentioned in clause 29 are, essentially, the same as those mentioned in section 380 of the 1985 Act, save for the updating that has been required to reflect the changes brought in by the Bill. We are not aware that the obligations under the 1985 Act have caused difficulties for companies.
I turn to the probing amendment that the hon. Member for Cambridge (David Howarth) tabled. I am going to pass a note, on the relevant means of incorporation by a resolution, that may help in the debate.

Jonathan Djanogly: That is okay.

Margaret Hodge: Amendment No. 182 is a probing amendment. It is important that the resolutions and agreements that are listed in clause 29(1) are filed with Companies House, as required by clause 30, because they can be of considerable constitutional significance. Clause 30 signals that by making it a criminal offence to fail to file those documents. The amendment proposes that failure to file should result in what one might call a nuclear option—namely, the amendment would be unenforceable. That may be intellectually defensible. As I get to know the hon. Gentleman better, I realise that that is where he is coming from. However, we believe that, in the real world, it is a step too far. It would mean that members of a company might unanimously agree to something, then find out years later that their agreement is worthless because the company failed to file a copy of it. In other words, the members would potentially pay a heavy price for the company’s administrative slackness. We believe that that is going too far and that it is not entirely fair.
Let us consider a small family company’s articles that exclude the model of articles and make no provision about, for example, whether the chairman should have a casting vote in directors’ meetings. If the members subsequently reached a key clause 29-type agreement that he should, but that agreement were not filed, the company would have no rule about the casting vote and, in a dispute about the matter, the courts would have nothing with which to guide their decision. Obviously it is better if agreement is filed, hence the clause, but we think it is better, pragmatically, to let the an agreement that is not filed stand than to treat it as though it had not been made.

David Howarth: I thank the Minister for that explanation. I am glad that the Government have thought through the consequences of the measure. The central point, though, is about shareholders’ agreements and not about changes to the articles. If one were to put oneself in the position of an investor in a small company that is affected by the shareholders’ agreement, if that agreement were not registered and the people who subsequently controlled the company did not reveal the shareholders’ agreement to the investor, what should the effect be on the investment? In particular, would the fairness argument work with regard to third parties and not just those who are subject to the agreement?

Margaret Hodge: I shall have to write to the hon. Gentleman on that point. If he remains dissatisfied, no doubt he will raise his dissatisfaction on Report. I hope that, given my explanation, hon. Members will not press their amendments.

Jonathan Djanogly: The Minister said that she did not think it was too important an issue because no companies had complained. In practice, some companies file documents, some do not and the situation is pretty much laissez-faire. So far as I know, no one has ever been picked up for doing one or the other, which is why I was keen to discuss the amendment. On that basis, I think that we have got to where I wanted to be, but I would be grateful if, in the letter that she promised, the Minister also elaborated on the point that she made to me earlier and sent me the same letter.

Margaret Hodge: I am happy to do so.

Jonathan Djanogly: With that, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 29 ordered to stand part of the Bill.

Clause 30 ordered to stand part of the Bill.

Clause 31

Resolutions and agreements to be embodied in or attached to issued copies of articles

Jonathan Djanogly: I beg to move amendment No. 15, in clause 31, page 12, line 19, after ‘a', insert ‘public'.
The clause relates to sections 382, 383 and 386 of the 1985 Act and is a fairly redundant carry-over provision from it. The theory is that, when printing articles in hard copy, copies of every resolution should be attached, but the practice is slightly different. Large public companies with company secretarial departments will usually spend some time updating the company’s printed memorandum and articles, for example, after changes made at the annual general meeting. However, the average company officer for small, mainly private, companies would probably not have much of a clue about what we were talking about in with this provision and would generally see it as an utter waste of time. It could be said that that is no excuse for them being ignorant of the law. Unusually, however, in this instance I disagree, because every item is already part of the public record. If they have not filed the resolution, it is important that that is corrected. However, hardly anyone asks companies for hard copies of the memorandum and articles of association. Practitioners will always go to the public record for such information.

Margaret Hodge: I know that we are about simplifying and modernising, but the provision refers to a requirement of company law going back to 1862, which arose at that time because there was a danger that, without the information contained in the document, somebody reading just the company’s articles would not get a complete picture of its constitutional arrangements. As the hon. Member for Huntingdon said, that provision has been incorporated into the 1985 Act and no doubt some of its predecessors.
Under the amendment, the clause would apply only to public companies. Although I can see that that would reduce the paperwork that private companiesÂ needed to produce in what the hon. Gentleman says would be a few cases, there is a danger that it would short-change those who are supplied with copies of a company’s articles.
I accept that the resolutions and agreements caught by clause 31 also have to be provided to the registrar under clause 30 and, as such, will be made available to members of the public. I think that that was the hon. Gentleman’s main point. However, we cannot see why private companies should be subject to lesser standards of constitutional transparency and accuracy or why members of private companies should be required to go to the registrar of companies and pay for copies of their documents to which they are currently entitled. If anything, to the extent that internal affairs of private companies may otherwise be less visible than those of public companies, the need for the provision may be even greater in the case of private companies. However, although we do not agree that it is appropriate to disapply clause 31(1) for private companies, the thrust of the hon. Gentleman’s amendment has caused us to look again at whether the clause could be more deregulatory. We believe that there is room for improvement. For instance, if a resolution or agreement merely changes the text of a provision in the articles, it might not be necessary to provide a copy of the resolution with those of the articles issued after the change.
It might therefore be worth modifying the language in clause 31 so as to clarify that point and the position of documents that record constitutional changes made by legislation or court order. I hope that that explanation and the possibility of a little more deregulation on Report will be sufficient to induce the hon. Gentleman to withdraw his amendment.

Jonathan Djanogly: I am certainly heartened by the Minister’s response and grateful for her offer to look again at the clause. We feel that further deregulation could apply in order to lessen red tape for small private companies. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 31 ordered to stand part of the Bill.

Clause 32

Statement of company’s objects

Jonathan Djanogly: I beg to move amendment No. 16, in clause 32, page 12, line 40, leave out subsection (1) and insert—
‘(1) The objects of every company shall be unrestricted'.
The clause deals with the statement of a company’s objects. The amendment probes the new provisions, but essentially reflects the fact that the ultra vires principle is of declining importance to what a company can do, or how or for what purpose it is run. Almost the only time that it arises is when banking lawyers check that a company is not restricted from borrowing. Frankly, in today’s corporate world, I can see little reason why such checks should be necessary.
I appreciate, of course, that that thinking is partly behind the merger of the memorandum and articles of association, as proposed in the Bill. However, the slow death of the objects, which the clause will induce, could cause transitional confusion, particularly when objects are hidden in articles. Is it not time therefore to bite the bullet and have the general objects provisions, which most new companies adopt, become the standard?
Finally, once the memorandum and articles of association are merged, can we be sure that we will continue to know what constitutes an object? Will the Government be issuing guidance on how those should be described in the articles of association, in order to avoid confusion?

David Howarth: My view of the amendment is similar to my view on entrenchment, which we have already discussed. Although I am sympathetic with the direction of change throughout normal commercial events in the world outside, I am still concerned about removing from companies the option of restricting their objects, if they find that commercially convenient. That situation might arise in joint ventures. Two business partners might find it useful to restrict the purposes to which a vehicle that they are using is put.
An argument could be made for saying that changes in company law over a long period have been towards general purpose companies—companies whose objects are not restricted—but that is no reason to remove the option. There are no effects on third parties. Because of the abolition of the ultra vires rules in almost all circumstances, there is no need to worry about the effects of restricting the objects on the outside world.

Jonathan Djanogly: The hon. Gentleman makes an important point. My understanding, however, is that where a company has general objects, pretty much anything goes, and most new companies have general objects. However, when a company retains specific objects, those must still be adhered to. As we move increasingly towards general objects, those that get left behind will increasingly lead to confusion.

David Howarth: The hon. Gentleman makes an interesting point. The deep conservatism of the drafting of company objects over the decades means that previous legal positions are left in companies’ objects at a lower layer and new objects or ways of thinking are layered over those, and we end up in an extraordinary situation where we have restricted objects, with fewer and fewer restricted objects placed above them. That is confusing.
I return to the basic principle that members of companies are entitled to do as they wish with their companies and with the way in which they set up their businesses. The problem with the way in which lawyers have given advice to companies on the subject is a separate problem.

Margaret Hodge: The hon. Gentleman makes my points for me. We seem to be revisiting this morning’s debate on entrenchment. In the clause we are not trying in any way to undermine the general thrust towards companies’ making more general provisions around their objects but to recognise that some companies want flexibility and that that will be reflected in their objects.
A company can choose to restrict its objects. Its directors will then be obliged to observe those restrictions. In clause 157 in particular, we impose a duty on the directors to act in accordance with the company’s constitution. No doubt we can come back to that point when we discuss the clause. As now, any restriction that applies to a company’s objects will have no effect on third parties dealing with companies because of the effect of clauses 39 and 40.
The proposed amendment would remove the flexibility allowing companies that choose to restrict their objects to do so. Although it would limit the choice, it is available to members of companies who might have good reason to wish to restrict their objects. Joint ventures, charities and specialist company vehicles, such as community interest companies, might all want to restrict their objects. The Bill gives them the freedom so to do, and the amendment would remove that freedom. We see no reason to remove the flexibility of companies to restrict their objects and consequently the powers of their directors to comply with those objects. I hope that the hon. Gentleman will not press the amendment to a vote.

Jonathan Djanogly: I shall not press the amendment to a vote, but it was important to make the point. I do not believe that the issue is the same as entrenchment: entrenchment is a new issue, whereas what we are dealing with now has been an ongoing process over centuries. We have reached a stage where, from a policy point of view, it would be helpful to move on. However, the Minister has made her point and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 87, in clause 32, page 13,line 1, leave out ‘alters' and insert ‘amends'.
No. 88, in clause 32, page 13, line 5, leave out ‘alteration' and insert ‘amendment'.
No. 89, in clause 32, page 13, line 6, leave out ‘alteration' and insert ‘amendment'.—[Margaret Hodge.]

Clause 32, as amended, ordered to stand part of the Bill.

Clause 33

Constitutional documents to be provided to members

Jonathan Djanogly: I beg to move amendment No. 18, in clause 33, page 13, line 18, after ‘company', insert ‘with a share capital'.

John Bercow: With this it will be convenient to discuss the following: Amendment No. 20, in clause 33, page 13, line 18, after ‘member,', insert ‘within 7 days,'.
Amendment No. 17, in clause 33, page 13, line 18, leave out from second ‘a' to ‘current' in line 32.
Government amendments Nos. 90 to 92.
Amendment No. 19, in clause 33, page 13, line 33, leave out from ‘capital;' to end of line 35.
Clause stand part.

Jonathan Djanogly: The clause relates to section 19 of the 1985 Act. I shall follow on from my remarks about the red tape requirements of printing resolutions and physically binding them into the memorandum and articles of association. The Minister moved on that issue, and perhaps there will also be movement on this clause.
If somebody, even a member of a company, wants to get a copy of its articles, resolutions or certificate of incorporation, they do so by getting a copy of the fiche from Companies House. The only benefit that I can imagine if members could use the clause to receive documents would come if they wanted to get them sooner than the 15 days that it takes for a document to be put on public file. The only provision in the clause that is worthy of retention is the ability to ask for a current statement of capital, which could be usefulfor a member to check against his or her own shareholding.
Amendment No. 20 reflects the fact that no timetable is given for a company to comply with such a request. I suggest that seven days is appropriate. Of course, if the period is to be more than 15 days, the registrar of companies should have the documents earlier than a member can get them from the company, which would negate the value of the clause. I believe that Government amendment No. 90 clarifies the wording rather than makes any change, but I would appreciate the Minister’s comments on it.

David Howarth: I am sympathetic to amendment No. 18, although I am not sure whether it has been drafted correctly and whether shareholding is the right criterion to use. An example is Equitable Life, which was an unlimited company without shares but which, as we know, ran into certain difficulties. It would have been useful for members of that organisation to have been able to obtain relevant documents. I ask the Government and the hon. Member for Huntingdon to reconsider the wording of their generally good amendments.

Margaret Hodge: I do not know whether the hon. Member for Huntingdon wants to reconsider the wording of the amendment, but we are not minded to accept it in its present form.
Clause 33 gives members of companies the right to obtain from the companies various constitutional documents free of charge. As the hon. Gentleman said, it replaces equivalent provisions in section 19 of the 1985 Act. A company can currently charge up to 5p a copy for any memorandums and articles that members may request, although I understand that companies rarely make that charge. The clause therefore updates legislation to reflect the new approach to the provision of constitutional information under the Bill. In particular, as we have said a number of times, the memorandum will have a more limited purpose, and information currently set out in it will instead be contained in a company’s articles or other documents listed in the clause.
Amendments Nos. 17 to 19 would restrict what can be provided to members by their company on request. If they were to be accepted, clause 33 would apply only to companies with a share capital, and members of such companies would be entitled only to a copy of the most recent statement of capital. As hon. Members know, such a statement is essentially a snapshot of a company’s subscribed capital at a particular time. While that information is of constitutional importance, the statement does not necessarily encompass all the information set out in the memorandum and articles to which we believe members are entitled and should have access.
The hon. Gentleman is right to say that it would be possible for members of those companies to obtain those documents, including the statement of capital, elsewhere, for example, from the registrar and others.

Jonathan Djanogly: Will the Minister remind me whether there are provisions in the legislation for companies to put their constitutional documents on a website? I know that there are websites on which public companies put their accounts.

Margaret Hodge: This morning, we discussed whether or not constitutional information about a company could be released into the public domain. The hon. Gentleman will correct me if I am wrong, but I think that we said that we would look favourably on enacting such a provision. The hon. Gentleman has pressed me on whether it will be available in the form that he describes, and I have shown that I will consider that favourably.
The question is whether members should have to go elsewhere. There is no provision at the moment, but in the debate this morning, we said that we would look at whether or not we could have that provision. Given where we are the moment, the question is whether an individual should have to go to the registrar or elsewhere to access those documents or should they be able to go to the company itself? Our view is that they ought to have the right to request and access that information directly from the company.
There are two reasons, one of which the hon. Gentleman accepted. The other is the matter of having to pay. If people go to the registrar, they would have to pay for something that they would get for free from the company. The second matter—the delay in notifying the registrar—is one that we have discussed in relation to the clauses on informing and notifying the registrar of changes to constitutional arrangements. That would be less satisfactory than current arrangements. I hope that the hon. Member is persuaded to withdraw his amendment, on the basis that I will consider whether we can open to the public more information that is on the web.

Jonathan Djanogly: Having heard the debate, I think that it has been a short but interesting one—

Margaret Hodge: I have not finished my remarks.

John Bercow: My apologies, I thought the right hon. Lady had finished.

Margaret Hodge: No, my apologies. I thought that the hon. Gentleman was intervening. However, I have not spoken the Government amendments in the group yet. Two are simple. One is slightly more complicated.
Government amendment No. 90 is purely a drafting amendment. Clause 33(1)(a) refers to:
“an up-to-date copy of the company’s articles incorporating any alterations made to them”
If the copy is up-to-date, one assumes that it has incorporated any alterations, so the those words are superfluous and need not be included. Hence, we suggest that they should be omitted. Similarly, as there is no need to use the plural “copies” at the start of clause 33(1)(b), in amendment No. 91 we are amending that to “a copy”.
No.92 is a slightly more substantial amendment. It is rare that a company’s laws are altered in any of the ways—by legislation, or by order of a court, or by order of another authority—contemplated in clauses 35 and 36. However, when such alterations do take place, it is accepted that they are likely to be of considerable constitutional significance to the company, so it is only right that the company should be obliged to supply a copy of the relevant piece of legislation to its members on request, just as it is obliged to supply copies of resolutions and agreements of the types listed in clause 29.
Finally, I will deal with the seven-day period. Information should be provided as promptly as possible, but I assure the hon. Gentleman that it would already be incumbent on a company to provide information within a reasonable time scale. Our concern is that the introduction of a statutory time scale, with a specific deadline and the threat of criminal sanctions if it is not met, could be disproportionate, especially for smaller firms. I am not aware of any evidence that the absence of this limit in the current legislation has caused problems. I hope, on that basis, that he will not press the amendment.

Jonathan Djanogly: To take the last point first, I thought it appropriate to ask for a statutory time scale because, in practice, these provisions will very rarely be used. Most people now go to Companies House and get a fiche and get the information from that, even if it is a company of which they are a member. These provisions would typically be used, and therefore rarely, in a situation in which there is a shareholder conflict and one shareholder is perhaps trying to pressurise the management by giving them lots of requests for documents and so forth. In all such situations, the lack of a time period is used by the company to delay matters. Perhaps the Minister would like to think about that again.
On the wider issue, the key point that has come out of the debate—and I apologise for ending it early—is the potential use of a website for the release of a company document. While the Minister was speaking, I had an idea that she may wish to consider. It is not a tabled amendment, but it might be a compromise. If a company has a website and files on it all the documents that it would otherwise be required to hand out under the clause, it could be assumed to have complied with the clause. However, if it does not have a website, it would still be forced to comply with the clause. It might be worth the Minister’s while to consider that. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 90, in clause 33, page 13,line 20, leave out
‘incorporating any alterations made to them”.
No. 91, in clause 33, page 13, line 22, leave out ‘copies' and insert ‘a copy'.
No. 92, in clause 33, page 13, line 29, at end insert—
‘( ) a copy of any document required to be sent to the registrar under—
(i) section 35(2) (notice where company's constitution altered by enactment), or
(ii) section 36(2)(a) (notice where order ofcourt or other authority alters company's constitution);'.—[Margaret Hodge.]

Clause 33, as amended, ordered to stand part of the Bill.

Clause 34

Effect of company’s constitution

Jonathan Djanogly: I beg to move amendment No. 21, in clause 34, page 14, line 8, after ‘part', insert ‘of the company and'.
This is a lawyers’ fest amendment. We have not had any of those so far. Amendments have been on practical issues, whereas this is the sort of thing on which law books are written. Hon. Members will be pleased to hear that I do not intend to read out a law book. The amendment is for the hon. Member for Cambridge (David Howarth) and no doubt he will wish to have his penny’s worth on it. It is covered by existing legislation—section 14 of the Companies Act.
Lord Wedderburn of Charlton, who has written a book on the subject, moved this amendment in the other place. He debated with skill and no little experience and put this vital clause into its historical context. He started at sections 7 to 10 of the Joint Stock Companies Act 1856. Simply put, no one now believes that this clause means other than that the constitution binds its members and the company as if they were covenants signed and sealed on the part of the company and of each member.
Lord Grabiner accepted Lord Wedderburn’s argument. Lord Sainsbury certainly did not disagree with it, but ended the debate by saying:
“I say now that the effect of a company’s constitution is not an area in which we want to introduce substantive changes.” —[Official Report, House of Lords, 30 January 2006; Vol. 678, GC. 37.]
I found that somewhat bizarre, not least considering the debates that we have had so far on the Bill, which have mainly centred on that point. Also, this is not what we should be doing in a 20-year reform of company law. If the clause has implications for the Foss v. Harbottle rule, should we not look at that now? I ask the Minister for her further comments.

David Howarth: I shall resist the temptation to rehearse my entire one-hour lecture on the clause, but I can send the notes to anyone who might request them. As the hon. Member for Huntingdon said, this is an old chestnut in company law. My interest, which I should declare, is that if I ever had to go back to teaching company law and the amendment goes through, I would be denied the most obvious essay title for the second week of the course that I ever had.
The hon. Gentleman talked about the point that Lord Wedderburn made in the Lords; Lord Wedderburn wrote a famous article about this in the Cambridge Law Journal as long ago as 1957, so we are about to mark the 50th anniversary of his interest in the matter. That the clause has the meaning put forward in the amendment is widely accepted, but there is another point to make. The case on which that assumption rests is a first-instance judgment of Mr. Justice Astbury in 1915. The Minister has already referred to the case, Hickman v. Kent or Romney Marsh Sheep Breeders’ Association, with which she is now fully familiar.
The serious point, to quote Professor Len Sealy, who is a leading and eminent writer on company law, is quite how remarkable it is that so shaky a first-instance decision has been tacitly accepted for the greater part of a century. There are articles in the academic literature that heavily criticise the decision—I seem to remember an article by Gregory in the 1981 Modern Law Review.
It is an extraordinary situation that something everyone assumes to be the law rests on so flimsy a foundation. The reason why the Government should give way and put these words into the statute is simply to give that foundation the firmness that it deserves.

Margaret Hodge: The provision was certainly an initiation for me into a wonderful bit of case law, the 1915 case of Hickman v. Kent or Romney Marsh Sheep Breeders’ Association. When that was put into a speaking note before I prepared, I tried to delve back into what on earth that famous case was about.
The Opposition may be pleased to know that I think that they have a point. Having looked at the debate and having seen Lord Wedderburn’s erudite contribution when the matter was debated in another place—I would like to thank him for his contribution—he has informed the view that we have taken today. The point behind the amendment is that if the clause and case law, including the famous judgment, acknowledge that the company’s constitution has the effect as if it were a contract between the company and its members, the law and the clause should say so. We are therefore happy to accept the amendment, although we will reflect further as to whether in the light of it we should revisit—a lawyers’ paradise—the use of the phrase “signed and sealed”. Subject to that, we will accept the amendment.

Jonathan Djanogly: I am staggered. I hardly thought that we would be making a bit of legal history this afternoon. Here we are—the Wedderburn-Djanogly amendment? I can dine out on this one for years to come. We are happy and delighted that the Minister has chosen to review the issue. We think that the new measure will more closely reflect practice.

Amendment agreed to.

Clause 34, as amended, ordered to stand part of the Bill.

Clause 35

Notice to registrar where company’s constitution altered by enactment

Question proposed, That the clause stand part of the Bill.

Jonathan Djanogly: I am in such a state of shock after the last decision that I nearly missed my spot. I will speak to clause 35 stand part briefly. We received a briefing from the Finance and Leasing Association that is significant enough that it deserves to be read. It says:
“There is an issue around existing safeguards provided to lenders under section 35 and 35B of the 1985 Companies Act which do not appear to have been transposed into the new Bill. In particular the Bill does not appear to include a provision making clear that a party dealing with a company is not bound to enquire whether the transaction that is being entered into is permitted by the company’s constitution, as was the case under Section 35B of the 1985 Act. Clause 31 (1) of the Bill says that the validity of any action taken by a company shall not be called into question by anything in the company’s constitution, which essentially replicates section 35 (1) of the 1985 Act. The explicit safeguard for parties...dealing with a company provided under 35B of the 1985 Act appears to be missing.
It does not appear to be an intention of the drafting to reduce the safeguards provided to lenders under the 1985 Act. The DTI Company Law Bill Team have confirmed that the intention was to transpose existing standards through”—
the Bill—
“however we believe that drafting has been misapplied and does not achieve equivalence with the 1985 Act.”

Margaret Hodge: I will consider that point.

Question put and agreed to.

Clause 35 ordered to stand part of the Bill.

Clause 36 to 38 ordered to stand part of the Bill.

Clause 39

A company’s capacity

Question proposed, That the clause stand part of the Bill.

Quentin Davies: I must apologise that, because of sheer negligence, I omitted to refer to my interests, which are declared in the Register of Members’ Interests, when I spoke on the Bill in Committee for the first time this morning. I spelled those interests out on Second Reading, so I hope that I will be spared doing so now, although I am happy to do so if required.
I do not rise to make a substantive point on the clause but because I think an explanation is required. I may be, and probably am, missing something obvious, but I do not believe that I am the only person likely to be confused when reading the Bill. Earlier, we passed clause 32, subsection (1) which says:
“Unless a company’s articles specifically restrict the objects of the company, its objects are unrestricted.”
The clear implication is that, if the company’s articles do restrict the objects of the company, the company will be so restricted by those articles.
Clause 39(1) states:
“The validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company’s constitution.”
In the clauses that we have discussed this afternoon, “constitution” has encompassed the articles, but subsection (1) states that nothing in the articles can restrict the company in any way. However, as I read it and as others will naturally read it, clause 32 states, at least by implication, that the company’s articles restrict the company’s activities if the articles are defined and drafted in such a fashion as to embody that restriction. 
I am perplexed by the apparent contradiction between clauses 32 and 39. If the Bill becomes law, as I trust it will, it will be in the public interest that anyone reading the new Act should not suffer the same confusion. We do not want to waste the public’s timeor that of the legal profession. If there is no contradiction, I should be grateful if the Minister explained why. If there is a danger of there being one, perhaps she could do something about it on Report.

Margaret Hodge: I shall read what I have been given on the purpose of clause 39, which I think gives the explanation that the hon. Gentleman seeks. If I get further information, I shall help him with it.
Clause 39 is about protecting third parties from the internal restrictions on a company’s capacity that may be contained in a company’s constitution. It provides that the validity of a company’s acts should not be questioned on the grounds of a lack of capacity because of anything in a company’s constitution. The clause replaces section 35(1) of the 1985 Act, which makes similar provision for restrictions on a company’s capacity contained in the memorandum. Under the Bill, the memorandum serves a more limited purpose, and the provisions in section 35(1) have been updated to reflect the fact that in future any restrictions on what a company can do—that is, restrictions on a company’s objects—will be set out in the articles of association.
The clause does not contain provisions corresponding to section 35(2) and (3) of the 1985 Act, which we are transposing, as the combination of the fact that under the Bill a company may have unrestricted objects and the fact that a specific duty on directors to abide by the company’s constitution is provided for in clause 157, renders those subsections unnecessary. Like section 35 of the 1985 Act, clause 39(2) makes it clear that special rules apply to charities. The provision is important and protects third parties that have dealings with companies. In that context, it should stand part of the Bill.

Quentin Davies: I have been listening to the Minister with great attention and interest, but I am not aware of having received any answer, even an attempted one, to the point that I raised, which was about the apparent incoherence between clauses 32 and 39.

Margaret Hodge: If I understand it properly, the point is that, under the clause, people acting in good faith will have some relief.

Quentin Davies: Frankly, I do not think that that is good enough. We must produce clear legislation, not a minefield of confusion for the future. There is nothing about good faith in modifying or in any way qualifying clause 39(1). There is a clear contradiction betweenthe two clauses, and I hope that the Minister willaddress it.

Margaret Hodge: My understanding is that there is not. I know that that is what is asserted but the clause specifically refers to third parties and to people acting in good faith. It is a complete transposition, except in the ways that I have said, of legislation in section 35 of the 1985 Act. It might be helpful if the hon. Gentleman turned to clause 40, which specifically discusses the powers of directors that will bind the articles of the company. Clause 39 concerns others acting in good faith and third parties.

David Howarth: I think that there is a fundamental distinction between clause 39 and clause 40. Clause 39 does not refer to good faith, and deliberately so. The point is that we should not go back to the bad old days of the ultra vires doctrine, under which disputes broke out in the context of contract litigation about whether the company had the power to make the contract in the first place and as either side of the contract might want to try to get out of the deal on the basis that the company lacked capacity to make it. The purpose of clause 39, and of its predecessor, is to end all such litigation and to ensure that nothing in the company’s constitution can be raised in litigation to undermine such a contract. Clause 40, on the other hand is about what happened—

John Bercow: Order. Interventions must be brief.

Margaret Hodge: I had actually completed what I was saying.

John Bercow: I apologise to the Minister. I had the distinct impression that she was giving way to the hon. Member for Cambridge. If that was not the case, I am happy to tender my apologies to the hon. Gentleman.

David Howarth: Thank you, Mr. Bercow. I had almost finished.
Clause 40 deals with directors dealing on behalf of the company and is quite separate from the question of the company’s constitution.

Quentin Davies: I am grateful for the opportunity briefly to come back to the subject.
As the hon. Member for Cambridge rightly says, clause 40 deals with quite a different matter, which we are coming on to and which is important. It deals with directors and whether they can be deemed to be acting ultra vires and, if so, what happens.
The hon. Gentleman did not address my point about the lack of coherence—I call it contradiction, and advisedly so—between clauses 32 and 39. Clause 39, with which I have no problem, states that it is not possible to set aside a decision or an obligation of a company on the grounds that it was entered into ultra vires. That seems inconsistent with clause 32, which states:
“Unless a company’s articles specifically restrict the objects of the company, its objects are unrestricted.”
That implies that if a company’s articles do so restrict, the company is consequently restricted by them. In other words, it upholds restrictions in the articles.
What will happen under the Bill, if it becomes law, if there is a contradiction between a company’s acts and the restrictions in its articles? Would it not be easier to have a separate clause that says that that is not a reason to set aside a contract and that the company is still liable for the undertakings in the contract, but nevertheless that maybe some sanctions should be taken against the director who acted inconsistently with the article of the company and that there would be just cause for the shareholders to pursue them on those grounds? I am merely setting out that example because it is important that we do not leave any degree of confusion in our wake.

David Howarth: The hon. Gentleman has set out an understanding of how the two clauses will act together. Clause 32 refers only to internal conflicts within the company, say between shareholders and directors who have acted in a way that is not authorised by the company’s constitution. The later clause has to do with third-party ability. He has explained exactly how it works. He might be right on the drafting of the clauses, but in practice I think that the position is well understood.

Quentin Davies: In practice, the position might be well understood, but the whole point of having a new company law Act is to enshrine in statute law even what might be well understood in existing jurisprudence. If not, is there any point in legislating? If in fact, existing jurisprudence is sufficient and perfectly clear, why are we wasting our time?
That exchange has been most revealing. There might be a basis for something of an alliance, at least on the Opposition Benches in the Committee, in order to improve the drafting. We have no substantive difference of opinion from the Government, but we would like some improvement in the drafting on Report.

Question put and agreed to.

Clause 39 ordered to stand part of the Bill.

Clause 40

Power of directors to bind the company

Question proposed, That the clause stand part of the Bill.

Quentin Davies: Again, on a point of elucidation, I refer the Committee to subsection (5):
“This clause does not affect any liability incurred by the directors, or any other person, by reason of the directors’ exceeding their powers.”
That returns to the ultra vires issue raised a few moments ago by the hon. Member for Cambridge. My problem is that the word “affect” seems slightly ambiguous. Does it mean that the subsection does not set aside any liability incurred by the directors? In other words, if the directors exceed their powers, can they be pursued by the members of the company who presumably will have suffered by the directors undertaking obligations that exceeded those powers? Or does it mean that the subsection does not give effect to any liability? In other words, does it not reinforce liability?
That is a big difference. The word “affect” covers a bundle of slightly opposite meanings. Again, my problem is with that word. Perhaps the Minister can explain whether she considers “affect” to be sufficiently precise for what is potentially a complex and dangerous area; we all know that ultra vires rules about directors have been the subject of much litigation.

Margaret Hodge: I think that I can be a little more helpful on that query. Again, the purpose of the clause is to provide safeguards for those dealing with companies in good faith. It has no impact on the liability of directors, which will be dealt with in clause 157, which we will discuss later. The clause before us will not have the impact that the hon. Gentleman described.
I am reluctant to enter into a debate in Committee on whether “affect” is the appropriate word. I assumed that in the drafting of the clause, lawyers chose an appropriate word. The clause has no impact on directors’ liabilities and duties, which are covered by clause 157, which no doubt we will spend considerable time debating.

Quentin Davies: That response was doubly unsatisfactory. It is not good enough for us to say that we are not responsible for words in the Bills that we pass in this place. We are responsible for those words and cannot simply say that it is all the fault of some parliamentary draftsman or lawyer. I did not like the Minister’s abdication of responsibility.

Margaret Hodge: If the hon. Gentleman was concerned about the word “affect” he could have tabled an amendment with a better term. I am saying that the parliamentary draftsmen advised me that that terminology met the purpose for which it was intended.

Quentin Davies: Encouraging me to table an amendment is a better response than the one that the Minister gave me on the first occasion.
When I raise an issue about the pertinence or meaning of a subsection, it is not satisfactory to say that the rest of the clause is perfectly all right. That is perfectly true—I totally agree with the purpose of the rest of the clause, and I likewise agree that anybody dealing with a company is entitled to take at face value the directors’ right to commit that company. That is clear, and our whole economic system would not survive were it not the case. The question, however, is whether the subsection is required at all. The hon. Lady says that directors’ liability is dealt with explicitly elsewhere in the Bill. That is perfectly correct. Why, then, do we need the subsection? It says:
“This section does not affect any liability incurred by directors, or any other person, by reason of the directors’ exceeding their powers.”
So the hon. Lady has introduced a reference to directors’ liability even though she stated that it did not belong in the clause but elsewhere in the Bill. There might be some slightly confused thinking on her part, and t is up to her to defend the presence of the subsection, because I am not convinced that it is necessary.

Margaret Hodge: Let me try to help the hon. Member. In my view, the subsection is in the Bill to clarify to all who read it that there is no implication for the duties of directors as set out elsewhere. If the subsection were omitted, the implication could be that directors were acting properly. We want to clarify through the subsection—which, as the hon. Gentleman rightly says, refers to people dealing with the company on the assumption that directors are acting appropriately and in accordance with the company’s constitution—that the clause in no way overrides directors’ obligations and duties as set out elsewhere. In my view, it is clear and it is not superfluous.

Quentin Davies: The Minister’s phrase “in no way overrides” is much clearer than the phrase “does not affect” and I wish that she had put the wording that she has produced this afternoon into the Bill when she supervised its drafting. I hope that the exchange this afternoon will help those who may, under the rule in Pepper v. Hart, need to refer in future to our discussions in order to construe the Bill when it becomes an Act.

Question put and agreed to.

Clause 40 ordered to stand part of the Bill.

Clause 41

Constitutional limitations: transactions involving directors or their associates

Question proposed, That the clause stand part of the Bill.

Jonathan Djanogly: This provision deals with transactions involving directors or their associates, and it ties in with section 322A of the Companies Act 1985. It was introduced relatively recently by the Companies Act 1989. At that time there was quite a lot of discussion about it, but there has not been much discussion since then, and it was not mentioned at all in the Lords. It provides some broad powers, particularly relating to interpretation and the courts’ ability as set out in subsection (6) to make orders
“on such terms as appear to the court to be just.”
Will the Minister provide details on the operation of the clause in practice and on the extent to which time has shown it to be fit for purpose?

Margaret Hodge: The clause retains the substance of section 322A of the Companies Act 1985. It applies to a transaction if or to the extent that its validity depends on clause 40, which is concerned with the powers of directors to bind a company. It provides that where the party to a transaction with the company is an insider, such as a director of the company or a person connected with such a director, the protection afforded by the clause does not apply. That is, the transaction will be voidable at the instance of the company. Irrespective of whether the transaction is voided, the insider, and any director who authorised the transaction, are liable to account to the company for any gain that they have made as a result of the transaction, and to indemnify the company for any loss or damage that it has incurred. However, where the insider is not a director of the company, it may be possible for him to avoid liability if he can show that at the time he entered into the transaction with the company he was unaware that the directors were exceeding their powers.
As now, under subsection (4) a transaction will cease to be voidable in certain circumstances, such as, for example, if a restitution of any money or asset that has been lost as a result of the transaction is no longer possible. It is purely transferring the substance of a section of the 1985 Act into the current Bill.

Jonathan Djanogly: I am not entirely sure that the Minister answered my question, which related to how this has worked in practice and to what extent it has been used. If she could drop me a line me on that at a later date I should be grateful. My impression would be that it would be a negative answer, but could she confirm that?

Margaret Hodge: For the record, my understanding is that there has not been a problem with the way that this provision has operated within the 1985 Act and I think that is why it has not been an issue of contention. If people have raised it with the hon. Gentleman, I will willingly look at it again. I understood that this was a completely uncontentious transposition of existing powers.

Question put and agreed to.

Clause 41 ordered to stand part of the Bill.

Clause 42 and 43 ordered to stand part of the Bill.

Clause 44

Execution of documents

Amendments made: No. 93, in clause 44, page 18, line 28, leave out subsections (2) and (3) and insert—
‘(2) A document is validly executed by a company if it is signed on behalf of the company—
(a) by two authorised signatories, or
(b) by one authorised signatory in the presence of a witness who attests the signature.
For the meaning of “authorised signatory”, see section (Authorised signatories).
(3) A document signed in accordance with subsection (2) and expressed, in whatever words, to be executed by the company has the same effect as if executed under the common seal of the company.'.
No. 94, in clause 44, page 18, line 41, leave out‘or (3)'.
No. 95, in clause 44, page 19, line 4, leave out
‘a director or the secretary'
and insert ‘an authorised signatory'.
No. 96, in clause 44, page 19, line 8, leave out from beginning to ‘is' in line 9 and insert
‘an authorised signatory are to be read, in a case where the signature is that of a director or secretary and that office'.—[Margaret Hodge.]

Question proposed, That the clause, as amended, stand part of the Bill.

Jonathan Djanogly: This issue was brought to me by a solicitor named Stephanie Biggs, but apparently represents the views of a significant number of City lawyers who have been discussing it. I therefore tabled amendment No. 54, but it has not been selected because it just slips out the title of the Bill. However, the issue is still important and is directly pertinent to the working of the clause. I raise it now, complicated though it is.
The wording of subsection (7) as currently drafted, replicates section 36A(7) of the Companies Act 1985. The purpose of that section was to make it clear that when acting as an attorney the company should follow the execution formalities applicable to itself as a company and not those applicable to the donor of the power of attorney who might be an individual, another company or various other types of entity. The subsection expressly leaves open the possibility that a document executed by a corporate attorney may be executed either in the name of the donor or in the name of the corporate attorney on behalf of the donor. However, there is no provision that expressly disapplies the common law rule that where a deed is executed by an attorney, as attorney, but in its own name, it is the attorney and not the donor who is bound by the deed.
In consequence, many company lawyers—

John Bercow: Order. I apologise for interrupting the hon. Gentleman, but he will be aware that it is not in order to discuss an amendment that has not been selected for debate. I feel sure, therefore, that he will immediately want to debate the issue of whether clause 44, as amended, should stand part of the Bill.

Jonathan Djanogly: Indeed, Mr. Bercow. That is exactly what I said I would do. As the amendment had not been selected, I was not suggesting that it should be debated. However, I wanted to raise the matter, as it is an important one and I had proceeded on that basis. A further amendment could be put forward at a later stage that would come within the remit of the Bill.
Many company lawyers are of the view that where a company executes a deed in its own name, but as attorney on behalf of another person, there is a technical argument that it is the corporate attorney and not that other person who is bound by the deed. I was attempting to clarify that where a corporate attorney executes a document in their own name, but on behalf of another person, provided that they are doing so properly, that is within the scope of their appointment and authority. It is that other person and not the corporate attorney who is bound by the document.
That is necessary because it is difficult to determine the way in which a corporate attorney executes, in practice, a document both in the name of another person and in accordance with section 36A of the Companies Act 1985. Corporate attorneys would generally execute documents on behalf of and not in the name of the other person. I appreciate that it is a complicated matter, but it is an important one. I would appreciate the Minister’s comments on that.

John Bercow: The Minister will use her discretion. She will understand and readily appreciate that it is not for her to respond to those parts of an argument that directly or indirectly address an amendment that has not been selected for debate.

Margaret Hodge: I am with you on that one. This was an attempt to raise the matter of disapplying common law rules to attorneys. I am not sure that the Bill relates to the law on attorneys. I am not sure that this is the correct place to discuss that matter. However, Miss Stephanie Biggs attempted to do so.

Jonathan Djanogly: I appreciate the Minister giving way. May I just point out that my points were directly related to section 44(7) of the Act?

Margaret Hodge: I understand that. The hon. Gentleman attempted to link his points to section 44(7), but they apply to a different batch of law on the powers and duties of attorneys. Therefore it is inappropriate for us—I look to other eminent people in the room—it appears to be inappropriate to comment on that today. I am open to receiving representations on matters from the members of the public or Members of Parliament. If the hon. Gentleman wishes to approach us in that way, we will see what help we can give.
The purpose of the clause is that it provides the means by which a company can execute a document itself. It is needed as a company, although a legal person can only act through human hands. The amendments to the clause, which we have already discussed and agreed, provide that, for all companies, the alternative to the affixing of its common seal is a signature by two authorised signatories or by one in the presence of witnesses.
It is a matter of everyday practical importance that the way in which a company executes a binding document should be clear, simple, rational and well-known. The clause provides a straightforward alternative to the use of a common seal in all circumstances for all companies under the law of England, Wales and Northern Ireland.

Question put and agreed to.

Clause 44, as amended, ordered to stand part of the Bill.

Clause 45

Common seal

Margaret Hodge: I beg to move amendment No. 97, in clause 45, page 19, line 25, at end insert—
‘(6) This section does not form part of the law of Scotland.'.

John Bercow: With this it will be convenient to discuss Government amendments Nos. 98 and 99.

Margaret Hodge: This group of amendments relates to the formalities of companies doing business. Clause 45 provides that a company may, if it wishes, have a company seal. The amendment to the clause makes it clear that that does not apply to the law in Scotland, because the comparable provision for the law of Scotland is found in a further clause, clause 49. That is our first amendment.
Clause 46 provides for the manner in which companies are to execute documents that are to be deeds. Although a deed is now only necessary for certain transactions, they are important; for example, the conveyance of land or the granting of a power of attorney. One party to such a transaction may insist on a deed. It is therefore essential that every company is able formally to execute the deed. The clause replicates section 36AA, which was inserted into the 1985 Act by the Regulatory Reform (Execution of Deeds and Documents) Order 2005. The order implemented the recommendations of the Law Commission, making clear that there are two separate steps in the execution of a deed. The first is the execution of a document, creating the deed, and the second is the delivery of that deed. The steps may or may not be simultaneous. The clause provides that the document is presumed to be delivered upon execution, unless a contrary contention is proven. I am told that the delivery is thus a rebuttal presumption, which means that it has occurred unless it is proven that it has not. The amendment simply ensures that the clause also applies to the law in Northern Ireland.
The amendment to clause 47 is needed so that under the law of England and Wales and of Northern Ireland a company may appoint an attorney whether or not it has a common seal. All the amendments are technical, and are needed to assure the appropriateness and efficacy of the Bill.

Amendment agreed to.

Clause 45, as amended, ordered to stand part of the Bill.

Clause 46

Execution of deeds

Amendment made: No. 98, in clause 46, page 19, line 29, before first ‘if’ insert
‘and for the purposes of the law of Northern Ireland'.—[Margaret Hodge.]

Clause 46, as amended, ordered to stand part of the Bill.

Clause 47

Execution of deeds or other documents by attorney

Amendment made: No. 99, in clause 47, page 19, line 36, leave out
‘writing under its common seal'
and insert ‘instrument in writing'.—[Margaret Hodge.]

Clause 47, as amended, ordered to stand part of the Bill.

Clause 48

Authentication of documents

Amendment made: No. 100, in clause 48, page 20, line 5, leave out paragraph (a).—[Margaret Hodge.]

Clause 48, as amended, ordered to stand part of the Bill.

Clauses 49 to 51 ordered to stand part of the Bill.

Clause 52

Pre-incorporation contracts, deeds and obligations

David Howarth: I beg to move amendment No. 183, in clause 52, page 21, line 17, at end insert
‘but he may not enforce the contract against any person who did not know, and who had reasonable grounds for not knowing, that the company had not yet been formed and for whom the identity or characteristics of the other party to the contract would have been a relevant consideration in entering into the contract'.
The amendment is mainly a probing one, but it raises a problem that has the potential to be the Hickman of the 21st century. The problem is what happens when someone purports to deal on behalf of a company that has not yet been formed. The situation does not arise often, but it is likely to arise in fast-moving business situations in which people are forming new companies and new businesses.
Originally, the problem was that, since the company did not exist at the time, since no one can be an agent for something that does not exist, and since agents have, in normal circumstances, no liability for the contracts that they make—it is their principals who are banned—someone who made a contract with a person purporting to act on behalf of a non-existent company had no rights at all. A legislative change was brought in to alter that situation. It gave rise to wording similar to that in the Bill. That wording has the effect of saying that, in such a situation, the person who purported to act on behalf of the non-existent company becomes banned by the contract. Therefore, the person on the other side has some recourse.
The problem is that the clause does not say what happens if the situation is reversed. It does not say whether the person who purported to act on behalf of the non-existent company gets rights in contract against the other party to the deal. The clause is silent on that point, which can be commercially important. There was a case in the Court of Appeal called Braymist Ltd v. Wise Finance Co. Ltd. It occurred in 2002. The Court of Appeal decided that in such a situation the person who purported to act on behalf of the company not yet in existence did get rights against the other party. Unfortunately, the Court was divided as to why. A majority of members thought that the meaning of the existing section meant that rights in contract were created, subject to common law restrictions if there were any. The other members thought, on the contrary, that the existing section had no effect on the situation but that contractual rights could be created by common law doctrines.
Why is that a problem? It sounds like the same thing. On one side, people say that the section creates rights subject to common law and on the other, people say that the section creates no rights but the common law can create a contract. The problem is that the area of contract law with which we are dealing is the most notoriously difficult and unclear area of contract law—namely, the area to do with mistake and, especially, with mistake of identity. The difference between the two sides of the Court will be of significance because on one side there is a presumption in favour of the creation of rights and on the other there is a presumption that may work in the opposite direction.
The amendment seeks to put into words the view of one side of the Court of Appeal and to invite the Government to think about whether they want to put into statutory form a solution to the problem, which may in years to come become a difficult and significant one.

Margaret Hodge: I bow to the hon. Gentleman’s greater knowledge and his long experience of teaching and researching in the area. My attention was also drawn to the case that he mentioned. One part of the judgment that he did not bring up was how liabilities and rights should be dealt with and whether their treatment should be enshrined in law or a matter for courts to decide. The judgment stated:
“Parliament intended to preserve the process of common law adjudication in this respect and to leave it to the courts to complete the exercise of defining the relevant circumstances.”
The matter that the hon. Gentleman wishes us to set out in the Bill is one that we have decided is best defined through common-law adjudication. The questions about liabilities and rights should be determined by the courts. The court made it clear that someone who is personally liable may be able to enforce the contract. I hope that that gives some comfort to the hon. Gentleman.
The amendment would define the circumstances in which an agent can enforce a contract, but the company law review examined the issue and did not recommend any change. I do not know whether the hon. Gentleman has a view on that, but what the courts have said and the process of the company law review mean that the clause covers the matter in the best way that it can. We should leave the courts to decide the rights and duties of all parties to contracts entered into before a company is formed.

David Howarth: I am perfectly happy with the Minister’s reply. It is a rational response for the Government to say that this is a difficult area and they will leave it to the courts to work out, but it is important that lawyers and those relying on the Act will know that that is the intention of the Government and Parliament. There may be further confusion; we are considering a Court of Appeal judgment and in the future there could be further developments in a higher court. At that point, we might have to return to the matter.

Paul Farrelly: Does the hon. Gentleman agree that if the amendment were to be accepted, apart from creating perhaps the longest and clumsiest sentence in a long Bill it would introduce a dangerous element of subjectivity by using the words “know” and “knowledge”? Those words could be prejudicial to future contracts, as people could have great scope to claim that they did not know something and therefore withdraw. The matter is best left to the courts on a case-by-case basis.

David Howarth: I do not wish to go into the details of the law of contractual mistake, but the hon. Gentleman will find that that area has some relevance when it comes to dealing with the subjective knowledge of parties. If the matter is left to the courts, it will at some point be set out in rules of the kind to which he objects. It might be better to put into statute a solution that is workable all round. Given the Minister’s reply, however, and the Government’s intention that the matter will be left to develop in the courts, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 52 ordered to stand part of the Bill.

Clauses 53 to 55 ordered to stand part of the Bill.

Clause 56

Other sensitive words or expressions

James Brokenshire: I beg to move amendment No. 116, in clause 56, page 22, line 24, leave out ‘registered’ and insert ‘incorporated’.

John Bercow: With this it will be convenient to discuss the following amendments: No. 117, in clause 56, page 22, line 24, after ‘includes’, insert
‘, or change its name to a name that includes,’.
No. 121, in clause 58, page 23, line 18, leave out ‘registered’ and insert ‘incorporated’.
No. 122, in clause 58, page 23, line 18, leave out ‘by’ and insert ‘with’.
No. 123, in clause 58, page 23, line 19, after ‘includes’, insert
‘, or change its name to a name that consists of or includes’.
No. 57, in clause 58, page 23, line 21, at end insert—
‘( ) Regulations under this section shall not require a company to change its name.’.
No. 128, in clause 66, page 27, line 32, at end insert—
‘(6) Nothing contained in this section shall prevent a company continuing to use its name if such name was registered with the registrar of companies prior to the date of any regulations made under this section.’.

James Brokenshire: I offer my warm welcome to you, Mr. Bercow. This is the second Committee on which I have had the pleasure of serving under your chairmanship, although I know that this is your first Bill Committee. The first occasion was when we considered a statutory instrument relating to double taxation treaties for Japan, Gibraltar and Botswana, so it is clear that you have been earmarked for Bills and legislation of a technical nature. We are therefore grateful for your stewardship this afternoon and on future occasions; I am sure that we will get into some quite technical issues during our considerations. I also offer a warm welcome to the Ministers—the Minister for Industry and the Regions, who is new to her role, and who will take this Bill forward, and the Under-Secretary of State for Constitutional Affairs, the hon. and learned Member for Redcar (Vera Baird). I imagine that this is her first Bill as a Minister.
I am making what may be described as a guest appearance on the Opposition Front Bench. I might flatter myself to think that it is on the basis of the strong oratorical skills that I have demonstrated since entering the House, but I fear that it is more due to my experiences as a corporate solicitor before I entered this place than anything that has taken place while I have been here. I remain a non-practising solicitor, and I declare that interest formally.
We come on to part 5 of the Bill, which deals with company names, restrictions on the names that a company may use, the manner in which a company may change its name and the procedures for challenging the use of a company name. Clause 56 makes provision to require the approval of the Secretary of State for a company’s use of a particular name that is specified in regulations.
Amendments Nos. 116 and 117 are technical in nature; the clause refers to a company being
“registered under the Companies Acts”,
but that drafting could be construed as limiting the ambit of the clause to a situation in which a company is about to be registered or established. The intent of the additions proposed under the two amendments is to ensure that the clause catches both the incorporation of a new company and an existing company that is seeking to change its name to one that is on the prescribed list. That is the intention of the clause, and the amendments seek to make that clear.
Amendments Nos. 121 to 123 relate to clause 58, which deals with restrictions placed on the use of certain symbols, characters or marks in a company name. The amendments make it clear that clause 58 covers a new incorporation and the change of name of an existing company.
Amendment No. 57 also relates to clause 58. Clause 58(1) uses the general term “registered” and clause 58(2) states that the regulations under the clause
“may prohibit the use of specified characters”,
so it seems possible for the regulations to cover the names of existing incorporated companies, forcing them to change their names with potentially significant cost implications and the loss of good will attached to the business. The issue was raised by my noble Friend Lord Hodgson in the other place during the Grand Committee on the Bill, and I note that the Minister, Lord McKenzie, stated:
“I assure the Committee that if a word is added to the list that is part of an existing company’s name, that existing company would not be required to change its name: there is no power to require a change in such circumstances.”—[Official Report, House of Lords, 30 January 2006; Vol. 678, c. GC48.]
I am aware of the issue about whether debates in this place or another place can be used to interpret a particular statute should it ever become subject to challenge, which was also raised by my hon. Friend the Member for Grantham and Stamford (Mr. Davies). However, the drafting of the clause could give grounds to suggest the contrary, and in the interests of certainty and clarity I hope that the Minister will feel generous enough to give ground on that point.
Amendment No. 128 makes substantially the same point as amendment No. 57 but in relation to clause 66, by seeking to make it clear that prohibiting theuse of certain specified words, expressions or other indications in the name of a company should not affect a company that has been incorporated or is registered with such a name. I should stress that that is without prejudice to the additional powers of the Secretary of State contained in clauses 75 and 76, which protect against misleading or harmful names used by existing companies, which we shall obviously discuss later.

Vera Baird: I, too, welcome you to the Chair, Mr. Bercow. We were until recently joint-chairs of the all-party Burma group, and I know what an amiable person you are to work with and what an active Chairman you are.
I thank the hon. Member for Hornchurch (James Brokenshire) for his kind welcome. I shall be speaking on the whole of part 5, as I assume he will be, so we will do it together and I imagine that we will make progress on it.
I am grateful to the hon. Gentleman for his explanation of the thinking behind the amendments. As I understand it, it crystallises around seeking certainty that the provisions of clauses 56 and 58 are limited to new incorporations and changes of name by existing companies and that that is their point. I agree entirely that it would be wrong if it were possible for regulations to require a company to change its existing name, but we are confident that it is not possible for that to occur.
The regulations will apply only to names registered after the regulations come into force, namely those taken on incorporation and those of existing companies that change their names. Let us consider the phrase “to be registered”, which is probably part, or perhaps all, of the trouble. It is intended to mean “to become registered” and not “to continue to be registered”. I hope that that is a sufficient clarification for the hon. Gentleman to be assured that the amendments are not necessary.
It is clear that if the intention of the new section were to enforce changes of name on existing companies, the clause would set out the consequences were a company name not to be changed if it did not comply with the regulations, much as such provisions are set out in clauses 65, 68, 75 and 76, and I hope that that reassures the hon. Gentleman. The phrasing “to be registered” in clause 56 and the other clauses that he mentions is exactly the same as that in clause 55, to which he did not propose any amendment. I can understand why clauses 55 and 58 might crystallise his concern more than clause 55 did, but I hope I have satisfied him that it is not our intention that it will be possible under these provisions to compel an existing company to change its name—nor should it be construed in that way—but that the measure will be confined as he wishes it to be.

James Brokenshire: I am grateful to the Minister. The query about the drafting was not necessarily mine; the Law Society questioned whether there was certainty as to the meaning or scope of the particular form of words. While my preference would have been to gain clarity by amending the wording, I hear what she says, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 56 ordered to stand part of the Bill.

Clause 57

Duty to seek comments of government department or other specified body

James Brokenshire: I beg to move amendmentNo. 118, in clause 57, page 22, line 38, after ‘name', insert
‘and in the absence of the applicant receiving any response by the specified department or other body within 30 days of its receipt of such a request, the specified department or other body shall be deemed to have confirmed that it has no objection to the proposed name'.

John Bercow: With this it will be convenient to discuss the following amendments:
No. 119, in clause 57, page 22, line 43, after ‘received', insert
‘or include a statement that no such response was received within the time period referred to in subsection (2)'.
No. 120, in clause 57, page 23, line 6, after ‘received', insert
‘or must include a statement that no such response was received within the time period referred to in subsection (2)'.

James Brokenshire: The clause makes additional provisions in connection with clauses 55 and 56. We discussed clause 56 under our previous batch of amendments. Clause 55 provides an approval mechanism, through the Secretary of State, in the event that the proposed name for a company suggests a connection with Government or with a public authority. Clause 57, to which the amendments relate, gives power to the Secretary of State by regulation to require an applicant wishing to change its name to a name falling within the ambit of clauses 55 and 56 to seek the view of a specified Government Department or other body. In such circumstances, the applicant must write to the relevant Department or body to ask it to indicate whether and, if so why, that body or Department has any objection to the proposed name.
It is interesting to note that while in many other fields within the Bill, there is a concept of e-government and filing by electronic means, in this circumstance communication has to be in writing, rather than by other means. Perhaps that can be addressed in due course.
To my mind, the weakness of the provision is that there is no compulsion on the relevant Department or body to do anything or to respond. There does not appear to be anything in the clause that says what happens if there is no reply, or if there is undue delay. It does not seem acceptable that an applicant wishing to trade under a corporate name in that way could be left to wait for months without an answer. It does not seem to be a particularly onerous requirement on the Department to respond. As Lord McKenzie of Luton said in another place, we are considering some 90 words such as “charity”, “European”, “dental”, “nurse”, “royal” and “trade union”.
The fact that a relevant body is not prepared to respond in a timely manner would suggest that the issue is unlikely to be of concern, and that the applicant seeking to change its name should be able to proceed without further delay. Amendment No. 118 therefore seeks to impose a time scale on the process by adding a provision to the effect that, in the absence of a response within 30 days of receipt of a relevant request, the Department or body will be deemed to have raised no objection. Amendments Nos. 119 and 120 seek to make consequential amendments to the remaining parts of the clause.
Given that the Bill is aimed at making things easier for business and at being deregulatory, I hope that the Minister will use this opportunity to demonstrate that intention, and that the amendments will therefore find favour. I note in closing that the clause largely reflects the language in section 29 of the 1985 Act, but the matter deserves further reflection and some updating of the wording. It would be helpful for all parties to gain some clarity and certainty in this context.

Vera Baird: Again, I thank the hon. Gentleman for his clear explanation of his proposal. Could I say straight away that I am advised that “writing” does not necessarily mean copperplate, quill pens or the things that we lawyers usually write in? The word is appropriate unless the context otherwise requires us to cover electronic communication, so there is no anachronism in the current wording.
I am sympathetic to anyone who suffers from official bodies not responding to their reasonable requests—not that it happens very much, of course—but I cannot agree to the amendment, as it would seriously weaken the protection to the public provided by the clause. The point of clauses 55 and 56, which are supplemented by clause 57, is to prevent people from being misled by a company having a name that wrongly suggests that it has some connection with an official body, expertise of a particular kind or a degree of pre-eminence.
Debate adjourned.—[Steve McCabe.]

Adjourned accordingly at thirteen minutes to Seven o’clock till Thursday 22 June at Nine o’clock.